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May 13, 2020

COVID-19 Ponderings: The US Unemployment Reaching Great Depression Levels

Aik Deveneijns
Aik Deveneijns Founder/CEO

Update

As per 5th of June 2020, the official unemployment numbers came out. Corrected for earlier errors in the unemployment numbers (due to misclassification), the official unemployment number is quite high at 16.3% (or 27 million), but not as bad as we expected it to be based on the numbers below.

There is potentially still a delay in the official numbers as overworked Government entities are struggling to process all data. However, the official numbers are a strong indication that a major part of the unemployed is currently being employed again, as the US is releasing quarantine restrictions and opening up retail, manufacturing, restaurants, travel and hotels.

Predictions on the US, EU and Dutch Startup Ecosystems

As a management team, we have made significant cost cuts within 10 days of the Dutch quarantine announcement. Not because of what was happening at the time, but because of what we were expecting to happen. We predicted a severe contraction of the demand for recruiting services as we were getting used to and easing out of the intelligent lockdown.

While executing on that plan for the last 2 months, I’ve felt there was little time for reflection. Now, I’ve been able to take a step back, look at the data and give colour to what I see is going on. Hopefully, with some indications of what’s going to happen after this. Looking back, our tough decisions seem to have been the right ones. And I feel confident enough to open source our thinking. With the intent to benefit the struggling ecosystem of startups, scaleups, venture capital investors and service providers, and hopefully to learn a thing or two in the interaction that might follow. 

As an engineer, I’m a data-oriented guy. The coaches at our student rowing club Thȇta, had the reputation of wearing not one, but two stopwatches while cycling along with the rowing boats. For you, youngsters out there: a stopwatch was a battery-powered dedicated handheld device for tracking time. “Meten is weten”, and “data levels all arguments”. If you have your eyebrows raised already: my old university is spawning increased levels of autism in the region… , but as well led to becoming – at least for a while – the smartest region in the world

Man on bike

Aik as a rowing coach, 20 years and 20kg’s ago, colourized.

As I’ve learned in my more recent youth (35+), most normal people have a pathological response to numbers and data: First symptoms involve the eyes glazing over, and after 10 minutes or so, they want to curl up in a fetal position, cry or put their thumbs in their mouths. Most notably leading the recruiters of LevelUp Ventures has taught me to lace data with preposterous amounts of humour and just enough practical nuance, to keep it entertaining. Not to mention the pretty pictures (see above, q.e.d.). In the future, I would like to think of myself as the John Steward or Arjan Lubach of numbers and data. But for now: I’ll just do my best! 

And if this is your first time with me… GOOD LUCK! 

I’ll start with the situation in the United States, because I feel it’s misunderstood on both sides of the Atlantic. And then segue to what this means for our own European economy and the Dutch ecosystem. I’ll wrap up with some predictions where this might go, and who knows; maybe we’ll figure out how deep the rabbit hole goes. 

The United States: current crisis = great depression

Where many investors focus on the monetary capital that supports startups/scaleups, we focus on the human capital; in-office recruiting in particular. Because this crisis requires us to be both masochistic as well as scientific, we will look at the opposite of recruiting; a phenomenon called unemployment. 

Official unemployment numbers in the US are severely lagging indicators. Their measurements come out 1 or 2 months after the fact. And because in Corona times we need to measure in dog years, these measurements are nothing short of useless. 

So, we can’t look at the official numbers yet. But there’s a workaround, we do know the number of jobless claims: US citizens requesting their unemployment benefits. Something we’d call “WW” in the Netherlands. 

It’s ironic that for civil servants that are traditionally so job secure, I have to do their job for them, talking about something that will most certainly not happen to them. And although you might’ve seen or heard of these numbers. Chances are you shrugged, and continued with your breakfast. They are simply too big to comprehend. 

I’ll try and put colour to it for you, and help you look at what they mean, with the purpose to recognize where we actually are today. So from there on we can make smart decisions, take action, grab opportunities. 

Because no matter how bad the state of the world is, or will be, a great change like this will bring tremendous opportunities for those nimble and hungry for risk. Not just for business, but for individual leadership as well. 

TL;DR: “Never waste a good crisis”. 

(you’re still here…? Wow!)

History of the US unemployment claims 

Let’s first look at the history of US jobless claims as they happened until early this year. You know, before the (bat) shit hit the fan.

A graphic showing the recession history in the US

We can see that the most recent crisis of 2008/2009 was a significant one. Worse than the internet bubble of 2000, and similar to the crisis around 1980. It’s hard to really envision this because most people in the startup ecosystem were still in school during the 2008 crisis. 

Let’s make a quick mental note here based on the chart above. Let’s note the highest number of jobless claims in a single week: 695.000 claims, somewhere in 1982. 

Spoiler alert: we are crushing that record, gangster-style

Back in 1982, I was only two years old. I really couldn’t be bothered with numbers or the economy just yet. Thank God some good people engineers recorded the numbers back then. So let’s jump right in!

The US unemployment claims during coronavirus

Now let’s have a look at that same chart, but now let’s include March-May figures. Oh boy, what a difference a few weeks can make!

Chart showing the unemployment of the US

Haven’t we been crushing it?! 10 times the previous record! Woot!

But at least each and every of the past 9 weeks broke the previous record with a factor of 4 to 10. This is literally unprecedented in recorded history. And mind you Millennials, I’m using ‘literally’ in the actual meaning of the word, not just as a filler. 

And just to pump your heart rate up just a bit more: these numbers are increments of unemployment. These weekly numbers are additive to each other (Assuming an insignificant number of people were able to find a new job in the past weeks). And then the combined 33 million is an increment on top of the already existing unemployment.

Total unemployment estimate in the United States?

43.700.000 humans out of a job…

That’s five times the working population of the Netherlands. 

I know we can’t possibly wrap our heads around this, no matter how I write it down.

So we expect that the US unemployment has jumped up from 3,5% late February to 26% right now. Yes indeed, if you had 100 people of working age in a room (1,5m distance obviously), 26 of them would on average be unemployed. That’s 1 out of 4, versus 1 out of 29 just 2 months ago.

This is the absolute disqualifier for Trump’s reelection, and the main reason the US is opening up their economy again. They are lifting their quarantine wayyy before they should (from a healthcare and death toll perspective). But hey, I get it… otherwise, death from suicide, shootings and famine is going to shoot up (pun intended). And yes, I said famine… death by hunger. 

Unemployment development back in time even more

OK, I know you haven’t wrapped your head around it yet, and I promised you more context. So we need to compare… 

“But Aik, for crying out loud, with WHAT?!”

We need to look further back, go back in time to the largest economic crisis in modern history. Let’s have a look at the Great Depression of 1929-1933. This crisis followed the ‘roaring twenties’, a period of abundance after World War I, excess wealth and an increasing wealth gap between the haves and the have-nots. This is how unemployment evolved at that time:

 Chart showing unemployment rate in the US

Look! An unemployment chart with a downward slope! This must be good right?!

(no, this data is 90 years old… And guess what ‘solved’ the unemployment in the early ’40s…?)

At the peak of the Great Depression, the US unemployment rate was ±24,5%. The same as it is today.

With the big difference that it took them 3 years to get there (from an admittedly higher unemployment starting point). Grandpa took a sweet 156 weeks, where now we only needed 7 weeks. Booyah, good job Americans! (again, pun intended) 

TL;DR: US unemployment is currently at Great Depression levels, but we got here 22 times faster.

And in absolute terms, it’s even scarier… The working population was a lot smaller back then, only about 50M. Since then, the US population grew a lot due to immigration and oh yes, women were welcomed into the workforce. 

So 24,5% of 50M is only 12,5M jobless individuals, peaking intra-year at maybe 14M. That’s quite different versus the ±41M unemployed people now. And hey, maybe my math is off (it isn’t), but it’s safe to say that three times more people are unemployed right now. WHY ARE YOU STILL READING!?

OK, let’s take a breather…

Chances are that it might recover quickly 

The US offers little job protection: employers can fire as they please, and effectively in the same week. So, we are seeing an impact on unemployment straight away. We’ve seen the worst of the layoffs for now. 

As the quarantine hit certain sectors hard, I expect a significant part of the layoffs to have been in travel, restaurants, hotels, and production sectors. Part of these lost jobs might be filled again quickly as soon as quarantine is lifted. 

The Netherlands

It’s going to be different in our country as a whole. And for now, I’m not zooming into our particular startup ecosystem. Good news! It’s going to be better ehh… less of a shitstorm: 

  • With stronger job protection and resignation periods, WW-claims (unemployment claims) in the Netherlands will be lower and lagging vs. the US. They will only start picking up much later and are not visible yet;
  • Government subsidies, like the NOW-measures, TOZO and TOGS, will reduce the costs and limit the loss companies will make. This will dampen the blow to companies, limiting the need for cost reductions and restructuring. Most importantly: preserving jobs;
  • Government credit-based measures, like tax delays, bank loan payback delays and additional and debt facilities (BMKB-C and COL) will not impact profitability but will increase the resilience of the companies to get through the first and hardest part of the downturn (or even all of it, if we have a swift recovery);
  • If somehow (and I don’t expect it), the economy will still be really bad 12 months from now, these credit measures will only delay the inevitable (“uitstel van executie”): companies will default, go bankrupt and/or have massive layoffs. For instance, with the 1.5m economy, the hospitality industry will be at great risk for such a scenario. A significant amount of bars and restaurants in the Amsterdam region will not survive.
  • Our (WW-)benefits in case of unemployment are much better than they are in the US. This is important for people losing their jobs, so they can stay in their house and as well to keep them spending and keep the economy going.

To summarize: it’s going to be much less bad over here. However, most of our bad news is still to come… As well, the US is going to recover earlier and faster than we will. Nevertheless, that might be very fast, versus fast.

Especially as the NOW will run its course in September or October, we’re going to see more layoffs and/or companies starting to go bankrupt.

The Dutch Startup Ecosystem 

Only a part of the startups are directly hit by the quarantine. The companies having a tough time are those selling into hotels (e.g. booking.com, MEWS, Hotelchamp, Oakly), restaurants & retail (Lightspeed, Orderchamp), offline training or factory/production. But even for them, there’s going to be opportunities. 

The Dutch startups are ready for remote work

But a lot of startups are actually doing great because they are well-positioned for a new ‘remote world. Some international public companies saw a share value increase even versus the pre-COVID peak of the market early March: Zoom (+36%), Amazon (+26%) and Peloton (At-home gym +20%), takeaway.com (+9%) and even Adyen (a payment processor, rose in value with 6.1%, just because ‘money flows’ are shifting from offline to online). These are all measured against the peak of the market, pre COVID-19 impact. As the rest of the market lost -30%, any increase in value is a huge thing. 

Smaller local companies in our ecosystem like Deliverect (restaurants moving to take-out), bol.com, Picnic, MapIQ (hardware for offices in 1.5m economy) are doing really well. So, there’s an opportunity here for growth already. 

Dutch Startups not really benefiting from NOW subsidy

Unfortunately, and in contrast to us, many startups can’t benefit from the NOW subsidy, for two reasons:

  • The NOW subsidy measures decline in revenue vs. the average revenue of 2019. Essentially punishing companies that have grown way beyond their 2019 revenue level: i.e. all healthy startups.
  • SaaS/subscription startups might all but stop signing up new customers, the revenue doesn’t really decline that much. So, based on the rules of the NOW, they are not eligible for it.

A better relief package for startups

The lobby from Techleap.nl, dutchstartupassociation.nl and founders+ has led to an initial startup relief program of €100M of bridge loans, which was later increased to €200M with support from Wouter Bos’ InvestNL. Although this seems like a lot of money, it really isn’t. As I warned some days before opening the bridge loan facility (27-APR)

Post from LinkedIn

Reality caught up, with startups requesting €630M two weeks later…

Wrapping up

So there we are, still in the middle of a storm but finally at a place where we can assess the damage, what’s coming next and figure out how to fix it. Our country and ecosystem are in a much better position and better health than that of the United States. However, and in contrast to the US, the worst is still to come over here. Our recovery will be later or slower or both. 

If our government is able to throw their weight behind it, but now with serious capital, we might have a shot. Additionally, if they are able to collaborate and coordinate with the venture capital funds, which are still very rich, we might be able to see a recovery as soon as this summer. Otherwise, it’s going to take well into Q4 to see any recovery and our international tech talent will have fled abroad.

No matter what, strong scaleups that were already cash-rich will become stronger, and might be doing some acquisitions in the second half of this year. The world will be different as we grow out of this crisis, but not in a way you might think. Prof. Scott Galloway, of which I’m a hysterical fanboy, boiled it down for us: 

Quote

Stay safe and keep lurking for all opportunities to come.

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